Streetwise: Dover Corp. worth researching

Monday

Sep 23, 2019 at 6:34 AM

If you are looking for a company to research, you might want to consider the Dover Corporation (DOV). One impressive standout characteristic is that Dover has been raising dividends for 63 consecutive years, with a dividend growth rate over the past 10 years of 8.98%.

Founded in 1947 and headquartered in Downers Grove, Illinois, the company's product line is broken down into three segments: engineered systems, fluids, and refrigeration and food equipment.

Dover’s corporate makeup is not the sexiest group of businesses on the planet, and its projected 3 to 4% organic revenue growth rate is not the most compelling growth story of 2019.

However, when I wrote about the company a year ago, my earnings estimate for fiscal 2018 was $4.83 per share and $5.35 per share in 2019, with a 12-month target price on the stock of $95, for an annualized gain of about 10%.

Back then, the shares had recently closed at $88.62. There was also an indicated dividend yield of 2.22%. So how did the company do? Earnings for 2018 came in at $4.97 per share, and the recent quote on the shares was $98.18.

That is all fine, but the critical question of course is how the company will do in 2019 and 2020. Dover has been displaying an impressive performance, aided by an upbeat outlook, improved performance by the engineered systems and fluids segments, strong overall demand and a solid backlog as well as cost-reduction initiatives. However, weak retail refrigeration demand and input-cost inflation due to the recent tariffs remain concerns.

Looking through 2019, Dover had adjusted its adjusted earnings per share guidance to $5.75-$5.85 from the prior estimate of $5.65-$5.85 for full-year 2019, backed by encouraging first-half results. This was driven by productivity and cost initiatives, strong demand and solid backlog. Robust order backlog, augmented by customer wins and execution of margin targets, will likely aid third-quarter 2019 results.

In addition, the company’s shares have gained about 12.7% over the past year, outperforming the industry's growth of 2.3%.

Dover's trailing 12-month EV/EBITDA ratio is 12, while the industry's is 12.6. If you look at Dover's price-to-earnings ratio, shares are underpriced at the current level, with a trailing P/E ratio of 17.8, which is below the industry average of 21.1.

Throughout 2019, the engineered systems and fluids segments' impressive performance, benefits from cost-containment actions, as well as footprint-optimization projects and retail refrigeration, will somewhat negate the impact of soft demand in the refrigeration and food equipment segment.

Dover expects to benefit from its targeted cost-reduction initiatives in 2019. The company has executed restructuring programs to better align costs and operations with the current market conditions through targeted facility consolidations, headcount reduction and other measures.

It will also provide a robust foundation for reinvestment, long-term sustainable revenues, earnings growth and strong free cash-flow generation.

Tariffs imposed on steel and aluminum products have led to higher input costs for Dover. Also, Dover's Refrigeration & Food Equipment segment has been bearing the brunt of weak retail refrigeration markets.

The segment's margin was affected by lower volumes in the SWEP heat exchanger business, notably in Asia and reduced refrigeration systems demand. Thus, weak refrigeration demand and lower shipments in Asia is likely to hurt margins in the near term. Considering this, Dover's Refrigeration & Food Equipment segment's top line will likely remain weak this year.

The intrinsic value of the shares, using a free cash flow to the firm model is $121 per share. My earnings estimate for fiscal 2019 is $ 5.80 and per share and $6.29 in 2020, with a 12-month target price on the stock of $110, for an annualized gain of about 10 percent. there is also an indicated dividend yield of 1.99%.

— Lauren Rudd is a financial writer and columnist. You can write to him at Lauren.Rudd@RuddInternational.com. Phone calls accepted between 10 a.m. and 3 p.m. EST at (941) 706-3449. For back columns please go to www.RuddInternational.com.

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